We summarise the highlights of the Corporate Sustainability Due Diligence Directive (CSDDD), with a special focus on those aspects that affect waste management.
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The new CSDDD Directive or CS3D (Corporate Sustainability Due Diligence Directive or Regulation on corporate sustainability due diligence) is based on:
Several EU member states (including France, the Netherlands and the United Kingdom) already have national ESG due diligence standards (Environmental, Social and Corporate Governance criteria). The EU-wide directive seeks to harmonise the application and frameworks of civil and criminal liability, as well as to expand efforts across the block.
This proposal aspires to impose due diligence with respect to potential or actual adverse impacts on:
It will affect large EU companies (more than 1,000 employees and 450 million euros in global turnover). Its application will be progressive and phased depending on the size of the company.
After several negotiations, the latest version of the text reduces the initially planned scope of application by 70%, placing it at around 0.05% of all companies in the Union (5,400 large companies) .However, large companies will apply the requirements in cascade to their partners and suppliers, so indirectly this Directive will affect many more companies across the region and in global value chains.
Specifically, the proposed Directive will apply to the following companies:
They are required to comply with due diligence:
The scope of application of the directive is established in companies that have been incorporated in accordance with the legislation of a third country and that meet any of the following conditions:
The Commission will have to publish a list of companies from outside the EU which fall within the scope of application of the directive.
The rules of the proposed Directive will first apply to very large companies with more than 5,000 employees and a net global turnover of 1.5 billion euros. Companies with more than 3,000 employees and a turnover of 900 million euros will have four years. Those with more than 1,000 employees and a turnover of 450 million euros will have five years.
Several precautionary measures are included for companies that do not pay the fines imposed in the event of a violation. In addition, the company's turnover is taken into account to impose financial penalties (that is, a maximum minimum of 5% of the company's net turnover).
And companies will be required to make a significant commitment, including a dialogue and consultation with affected stakeholders. In addition, the agreement states that compliance with the CSDDD could be qualified as criteria for the award of contracts and public concessions.
Non-EU companies will also be subject if they meet the above-mentioned thresholds and operate in the EU.
Third country companies included in the scope of application must appoint an authorised representative within the EU.
Even if the company falls outside the scope of the EU CSDDD, increased pressure to align operations and supply chains with ESG objectives is likely to drive similar legislation in other jurisdictions.
The text of the Directive does not propose rules directly applicable to small and medium-sized enterprises, but it does state that, if they are suppliers or participate in any way in the supply chain of any eligible company, they must be aligned with the latter's policies.
In the event that these SMEs do not have their own capacity to comply with company policies, the latter will be responsible for supporting them so that they can improve their performance.
The proposal provides for specific support to help SMEs to gradually incorporate aspects related to sustainability into their business activities.
The CSDDD considers that for due diligence to have a significant impact it must cover "adverse environmental impacts generated throughout the life cycle of production and sale and waste management of products or service provision". These adverse impacts occur "at the level of own operations, subsidiaries and in value chains".
When "a company sources products containing recycled material, it can be difficult to verify the origin of secondary raw materials". For that reason, "the company should take appropriate measures to trace secondary raw materials back to the relevant supplier and assess whether adequate information exists to demonstrate that the material is recycled".
It also states that "The value chain should cover activities related to the production, distribution and sale of a good or the provision of services by a company, including [...] the waste management of the product.
The directive includes the obligation to identify and prevent, mitigate or terminate an adverse impact in one of several environmental categories, including "harmful generation and mismanagement of waste, including hazardous substances".
Member States should:
Companies will be required to:
The approval of the Directive will mean for companies subject to this standard:
The European Parliament gave the green light to the Due Diligence Directive on 24 April 2024. The next step will be for the European Council to formally approve it, expected on 23 May 2024. The Directive will enter into force 20 days after its publication in the Official Journal of the EU, probably in the third quarter of 2024.
Member States will have two years after entry into force to transpose the legislation into national law, and the requirements will start to apply to companies three, four and five years after entry into force, depending on the size of the enterprise.
In terms of the environment, large companies must adopt and implement a transition plan for the mitigation of climate change. In addition, the future law clarifies the nature of the environmental impacts covered as any measurable environmental degradation, such as harmful soil changes, water or air pollution, harmful emissions or excessive water consumption or other impacts on natural resources.
However, environmental advocates point to the gaps in the new regulations, such as the exemption of some financial institutions and the proposed delays in application deadlines. After the provisional agreement reached in December, WWF stated that, although the Directive will help companies in their transition to a zero net balance sheet, due diligence requirements do not meaningfully address the relevant role of companies in protecting nature, placing the ecosystems and communities most affected by the climate emergency in an even more vulnerable position. For its part, Oxfam proposes, among other measures, that the due diligence standard applies to all companies, to the entire value chain, that the financial sector be included and that companies be obliged to adopt and implement a climate transition plan in line with the Paris Agreement.
On the other hand, Member States and industry representatives have opposed the scale and ambition of the current EU environmental regulation campaign, as well as its timetable. Industry groups also cite the potential of the proposed directive to curb investment and open the floodgates to litigation against companies.
Due diligence is a process that allows companies to identify, prevent, mitigate and account for how to address their real and potential adverse impacts. In this post, we summarise the highlights of the new European directive on corporate due diligence in the field of sustainability (CSDDD), focusing especially on those aspects that affect waste management.
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